Observing that alternative investment avenues are becoming more attractive to retail customers, the Reserve Bank of India (RBI) says due to this, banks are facing challenges on the funding front, with deposits trailing loan growth.
"Banks are taking greater recourse to short-term non-retail deposits and other instruments of liability to meet the incremental credit demand. This, as I emphasised elsewhere, may potentially expose the banking system to structural liquidity issues," says RBI governor Shaktikanta Das.
While expressing concern over household savings moving towards alternative investment avenues, he asked banks to mobilise deposits through innovative products and services by leveraging their vast branch network.
In response to the cumulative policy repo rate hike of 250bps (basis points) since May 2022, the weighted average lending rates (WALRs) on fresh and outstanding rupee loans of SCBs have increased by 181bps and 119bps, respectively, from May 2022 to June 2024. During the same period, the weighted average domestic term deposit rate (WADTDR) on fresh and outstanding deposits of scheduled commercial banks (SCBs) increased by 243bps and 188bps, respectively.
With credit growth outpacing deposit growth, banks have raised their term deposit rates in addition to mobilising funds through higher issuances of certificates of deposit (CD). In FY24-25 (up to July), CD issuances amounted to Rs3.2 lakh crore compared to Rs1.9 lakh crore in the corresponding period of FY23-24.
Mr Das also pointed out the high growth witnessed in certain segments of personal loans, especially when there was a moderation in credit growth after regulatory measures by RBI in November last year.
He says, "Excess leverage through retail loans, mostly for consumption purposes, needs careful monitoring from a macro-prudential point of view. It calls for careful assessment and calibration of underwriting standards, as may be required, as well as post-sanction monitoring of such loans."
In November 2023, RBI increased risk weights on unsecured consumer credit and bank credit to NBFCs (non-banking finance companies) to pre-empt the build-up of any potential risk in these segments. Consequently, the total consumer loan growth in the sectors where risk weights were increased moderated from 23.3% in November 2023 to 13.9% in June 2024. In parallel, bank credit to NBFCs declined from 18.5% to 8.2% during the same period.
According to RBI, credit growth in unsecured personal loans such as 'credit card outstanding', though declining, remained high at 23.3% in June 2024 compared to 34.2% in November 2023.
Mr Das also mentioned home equity loans, or top-up housing loans as they are called in India, which are growing at a brisk pace. He says that similar to other collateralised loans like gold loans, banks and NBFCs offer top-up housing loans.
"It is noticed that the regulatory prescriptions relating to the loan to value (LTV) ratio, risk weights and monitoring of end use of funds are not being strictly adhered to by certain entities. I repeat certain entities. Such practices may lead to loaned funds being deployed in unproductive segments or for speculative purposes. Banks and NBFCs would, therefore, be well-advised to review such practices and take remedial action," the RBI governor says.
Anil Gupta, senior vice-president and co-group head for financial sector ratings at ICRA, feels that with increased activity levels in the top-up loan segment, RBI's caution to lenders on calibrating underwriting norms and closer monitoring of the end-use is a step in the right direction. "Such loans not only raise concerns on overleveraging but, it also raises suspicion on the quality of such borrowers, as they may also use such top-up loans to service the existing loans."
